Eurogroup approves Spanish bank bailout

Submitted by Michael Hewson on Tue, 04/12/2012 - 06:36

European markets look set to open lower this morning as once again concerns about a resolution to the US fiscal cliff keep markets within their recent ranges amidst disappointment over yesterday's disappointing ISM numbers for November.

Yesterday's decision by Spain to ask for €37bn of aid for its banking recapitalisation plan had been widely expected for some time, however one can't help feeling that the amount being asked for could be one of many requests over the coming months.

With the aid being conditional on sweeping job cuts in excess of 6,000, and bank branch closures across the country the effects are likely to be felt across the entire Spanish economy, which is already seeing tax revenues shrink sharply.

When looking at the state of the economy, the likelihood that the country will miss its fiscal target for 2012 and a further 90k increase in unemployment numbers for November to be confirmed later today, the likelihood remains that the number of non-performing loans can only increase.

The last number, as confirmed by the Bank of Spain last month, was €182bn and with banks in Spain being forced to extend forbearance, losses will only take longer to realise as the economy contracts and the unemployment rate increases.

Even though Spanish bond yields have continued to decline in recent weeks it can only be a matter of time before the Spanish Prime Minister will find himself forced to request a sovereign bailout to go with the banking one.

As well as the approval by European finance ministers of the Spanish bank bailout, ministers will be discussing the latest terms of the Greek bailout package, as well as a bailout for Cyprus, while the refusal of EU ministers to extend the softened Greece bailout terms to the other program countries Portugal and Ireland is bound to foster feelings of resentment from countries who have played by the rules, and yet appear to be being penalised for it.

The subject of a successor to Eurogroup head Jean Claude Juncker is also likely to be a topic for debate in the coming weeks.

In the UK yesterday's better than expected manufacturing PMI data for November has raised hopes that the UK economy may be starting to recover in Q4, which thus far has seen some disappointing numbers. Today's construction PMI data is expected to slip back slightly from 50.9 to 50.6, with all eyes on tomorrow's UK budget and Autumn Statement amidst concern about the sustainability of the UK's triple "A" rating.

In Asia the Reserve Bank of Australia cut interest rates as expected by 25 basis points in response to recent soft economic data, as well as concern that the high value of the Australian dollar is starting to hurt export competitiveness.

EURUSD - yesterday we saw the single currency break above trend line resistance at 1.3060 from the highs this year at 1.3360. The risk is now that we retarget the September highs at 1.3175, and even retest the highs this year at 1.3485.
For the downside to open up again we need to see a break back below the 50 day MA and 1.2900 retargets a move towards the 200 day MA at 1.2790, while below that we also have trend line support from the 1.2050 lows which now comes in at 1.2770.

GBPUSD - yesterday we saw the pound break through both the 50 day MA at 1.6050 and channel line resistance from the 1.6310 highs which now has the potential to target 1.6180 as well as the 1.6250 resistance from the 1.6745 2011 highs.
Only a drop back through 1.6050 undermines this bullish scenario and targets a retest of the 1.5960 lows of last week.
Major trend line support remains at 1.5835 from the 1.5270 lows, as well as 1.5660.

EURGBP - a tweezers top yesterday at 0.8135 has seen the single currency slip back and could halt the rally towards the October highs at 0.8165 as the next resistance. The move higher could well be undermined by a move below the 0.8100 level towards the 200 day MA support at 0.8050. Also on the downside we have trend line support at 0.8010 from the July lows at 0.7755.

USDJPY - there appears to be a potential double top forming on the four hourly charts with the base at 81.75. If we break below 81.70 then the potential is there for a move towards 80.50, and even 79.90.
We need a break above the 82.80 level to target a move towards the March highs above the 84.00 level.
Only below the 80.50 level suggests a move back towards the November lows at 79.00.

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